Will Sirius Minerals plc plunge like 88 Energy Limited?

Investing in speculative small caps such as Sirius Minerals (LSE: SXX) and 88 Energy (LSE: 88E) is fraught with uncertainty. I last wrote about these two in April and it’s interesting to note their progress since then.

Sirius Minerals is up 96% since April but the shares were 182% higher during August. Meanwhile, 88 Energy is down 12% but was 37% higher than April’s 2.58p during August. Such volatility means we can’t rule out a complete reversal of Sirius Mineral’s share price gains since April, as we’ve seen with 88 Energy.

Great potential and zero earnings

Neither firm has posted…

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Investing in speculative small caps such as Sirius Minerals(LSE: SXX) and 88 Energy (LSE: 88E) is fraught with uncertainty. I last wrote about these two in April and it’s interesting to note their progress since then.

Sirius Minerals is up 96% since April but the shares were 182% higher during August. Meanwhile, 88 Energy is down 12% but was 37% higher than April’s 2.58p during August. Such volatility means we can’t rule out a complete reversal of Sirius Mineral’s share price gains since April, as we’ve seen with 88 Energy.

Great potential and zero earnings

Neither firm has posted any earnings yet, but they both have a great story and bags of potential. Early in 2016, 88 Energy and its partner Burgundy Xploration discovered oil in Alaska with their Project Icewine. The discovery was transformational with 88 Energy’s shares rocketing by around 1,200% by March before dropping back to where they were when I wrote about the firm in April.

Even today the share price is almost 800% higher than it was at the beginning of the year, so that puts the volatility in perspective. I think we should expect an ongoing bumpy ride as the company works to commercialise its discovery. Right now the firm is preparing to drill its second well in the Icewine project financed by an oversubscribed placement during May that raised around $25m before costs by issuing 715 m new shares. On top of that, the company took on a $50m loan agreement with the Bank of America to fund specific projects.

Need for finance

The current low price of oil and the firm’s ongoing need for capital to fund further exploration and development make the outcome for investors uncertain from here, I reckon. A fair amount of the project’s potential must already be realised in 88 Energy’s share price after such large advances.

Big uncertainties revolve around the need for financing at Sirius Minerals, too. The firm aims to become a world-leading multi-nutrient fertiliser producer with its polyhalite mine development project in North Yorkshire. The directors have overcome the planning hurdles but Sirius Minerals now needs to raise billions to build the mine before it can earn a single pound of revenue from mining potash. It’s unclear how the process will unfold for investors from here. The great risk with both of these companies is that cash demands could lead to further share dilution, which could work against investor total returns.

In both cases, ongoing share price volatility seems assured and I’m reluctant to buy the firms’ shares unless their charts show weakness in the price. For speculative investments like these, one strategy could be to keep positions small relative to the size of a share portfolio, buy only on down days, never average down, and to exercise a lot of patience as the stories play out.

What next?

Small-Cap investing can be a faster-moving game than investing in FTSE 100 stalwarts and other larger firms, but the rewards can be substantial when you get the timing right. It’s not always necessary to look at the most speculative of shares for big gains either. Firms with a track record of revenues and profits can grow fast and the Fool Analysts believe this company could go on to deliver for investors.

This research is free to download, so to find out more about this company, click here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.